Meal-kit company Fresh Prep faces hefty competition as it gears up for expansion

In the first 1½ years Fresh Prep Foods Inc. was in business, the Vancouver meal-kit company signed on 200 customers.

It was a slow start in the rapid-growth business of meal kits, where ingredients for dinner are portioned and packaged to cook at home – cutting out the need to hustle through grocery aisles for each item in a recipe. Fresh Prep, launched in early 2015, spent time figuring out the foundation of its business, the things it does differently than its competitors, from reusable delivery bags to a delivery network of drivers the company oversees.

“If we went too fast, too quickly, that would require losing focus on our operations. Things wouldn’t be as tight,” said Husein Rahemtulla, one of three co-founders alongside Dhruv Sood and Becky Brauer, all in their late 20s and friends from youth.

Today, Fresh Prep is primed to jump beyond the Vancouver region, backed by a fundraising round in process. It is opening a new headquarters here to underpin expansion. The company started deliveries in Victoria this fall and in the spring will begin serving Calgary and Edmonton. If it goes well, Fresh Prep would look to start work on an eastern facility next fall, likely in the Toronto region, to deliver its meal kits in Toronto, Ottawa and Montreal.

The go-slow approach has so far served Fresh Prep well. But the meal-kit business is labour and capital intensive, and the competitive landscape is unforgiving. The likes of Amazon and Walmart have experimented in the market, and large grocery store chains are moving in, too. Toronto-based Chefs Plate Inc. last year led the Canadian market and eyed an initial public offering but in October, sold out for roughly $50-million to HelloFresh SE, the Berlin-based global meal-kit leader.

Blue Apron Holdings Inc. is an example of what can go wrong: The New York company grew too quickly. Three years ago, Blue Apron had about two-thirds of the U.S. meal-kit market. It went public last year but was 2017′s worst-performing IPO and now trades around US$1.17 after debuting at $10 in June of last year. The company has cut back on marketing to rein in costs, but has lost more than a third of its customers, a number now at 646,000.

Mr. Rahemtulla, whose background is in philosophy, professional poker and hotel management, said Fresh Prep focuses on keeping the customers – 17,000 so far – it signs on.

“What we feel our competition is doing, and really led to Blue Apron’s downfall, is that they’re spending so much to acquire customers,” Mr. Rahemtulla said.

Fresh Prep charges $10 to $11 per meal per person, similar to its competitors. HelloFresh Canada charges $10 to $12.50, and Chef’s Plate charges $9.75 to $12.95.​

Fresh Prep believes its delivery strategy gives it a key advantage. Its competitors use Canada Post and FedEx to deliver their product. Fresh Prep, with its own drivers and reusable delivery bags, does it at a lower cost and parlays this into spending more on its food. Ms. Brauer, in charge of the menu, said: “Our proteins are next level.”

Even HelloFresh has its struggles, reporting a 2-per-cent decline in customers to 1.84 million in September from a peak in March. This comes as HelloFresh spent more than a quarter of its revenue on marketing in the first nine months of 2018 – about $360-million in the 11 countries it operates. The company’s year-over-year customer growth is 44 per cent but the seeming plateau has dissuaded investors. HelloFresh stock, after a weak third quarter, is down 8 per cent from its IPO price of a year ago and off close to 40 per cent from a high in July.

In the United States, according to Nielsen, one in 10 households has tried a meal kit. The Canadian market is less developed, with penetration estimated in the low single digits. Analyst Frederic Tremblay of Desjardins Capital Markets said the HelloFresh-Chefs Plate deal “validates the attractiveness of the Canadian meal-kit market.”

Goodfood Market Corp. of Montreal – about the same size as the combined HelloFresh Canada-Chefs Plate – is thriving. Goodfood shares have climbed about 45 per cent since the company went public on the Toronto Stock Exchange in June, 2017. Goodfood had 89,000 customers across Canada as of this August, about triple from a year earlier. Analyst Leon Aghazarian at National Bank Financial predicts the number will climb to 155,000 by next August.

Amid this rapid growth and upheaval, Fresh Prep has had to grind out its first major fundraising round – $3-million in equity and debt from individual and institutional investors – set to close this month.

“It has been difficult,” Mr. Sood said.

Being profitable helped, measured by earnings before interest, taxes, and depreciation. Fresh Prep, with its controlled growth, squeaked into the black in fiscal 2018, ended June 30. “Just barely – but we made it,” Mr. Sood said.

For 2018, Fresh Prep is looking at sales of $11-million or so, more than triple 2017. The company aims to reach an annual run-rate of $20-million next spring.

When the three co-founders are asked whether they can see Fresh Prep as the eventual No. 1 meal-kit company in Canada, there is a short pause and then a definitive yes.

“We like to think of ourselves,” Mr. Rahemtulla said, “as the tortoise in the race.”